Updated from 11:01 a.m. EDT

In a deal that will combine one of the world's leading investment banks and Wall Street's largest clearing firm,

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

announced Monday that it would acquire privately held

Spear Leeds & Kellogg

in a part-cash, part-stock transaction valued at $6.5 billion.

Under the terms of the agreement, Goldman Sachs will finance the deal with about $4.4 billion worth of common shares -- about 35.4 million shares, based on Friday's closing price of $124.25 -- and pay the remainder in cash. The firms expect to complete the transaction by year's end, pending regulatory approval.

The agreement would combine Goldman Sachs' massive investing, advisory and financing operations, with Spear Leeds & Kellogg's leading franchise in market making, and clearing and executing orders. Spear Leeds, a New York-based specialist firm, makes markets in about 6,400


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"In joining forces with Goldman Sachs, we combine two premier franchises into a powerful engine for growth," said Peter Kellogg, founder of Spear Leeds & Kellogg, in a statement.

Goldman Sachs Chairman and Chief Executive Henry Paulson added that the deal would provide "tangible benefits" for his firm and its clients, and extend Goldman Sachs' leadership in market making, execution, and clearing. "We have very similar cultures and a shared vision of harnessing technology to drive markets," he said.

At current 2001 earnings estimates, Goldman Sachs said the transaction would be at least 2% accretive on a financial reporting basis, and more than 9% accretive on a cash basis. The deal assumes cash benefits of $50 million in lower financing costs. It would create about $5 billion in nonphysical assets, like trademarks and goodwill, to be amortized over the next two decades.

As part of the deal, Goldman Sachs said it was establishing a $900 million pool of common stock for Spear, Leeds & Kellogg employees, with varying vesting and delivery provisions.

Goldman Sachs, which went public in May 1999, has seen its stock more than double over the past year. The stock hit a 52-week high of $132.88 last Wednesday. Goldman Sachs finished Monday regular trading up $8.06, or 6%, at $132.31.